Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons

Guillermo Calvo, Alejandro Izquierdo and Ernesto Talvi

No 1909, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper offers an alternative explanation for t he fall of Argentina's Convertibility Program based on the country's vulnerability to Sudden Stops in capital flows. Sudden Stops are typically accompanied by a substantial increase in the real exchange rate that wreaks havoc in countries that are heavily dollarized in their liabilities, turning otherwise sustainable fiscal and corporate sector positions into unsustainable ones. In particular, we stress that the required change in relative prices is larger the more closed an economy is in terms of its sup ply of tradable goods. By contrasting Argentina's performance relative to other Latin American countries that were also subject to the Sudden Stop triggered by the Russian crisis of 1998, we identify key vulnerability indicators that separated Argentina from its peers. This document also provides an explanation for the political maelstrom that ensued after the Sudden Stop, based on a War of Attrition argument related to the wealth redistribution conflict triggered by the Sudden Stop and fiscal collapse. This framework also provides elements to rationalize the banking crisis that accompanied the fall of Convertibility.

Keywords: WP-469 (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2003-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons (2003)
Working Paper: Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:1909

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